Which is cheaper to run each year?
An LLP is cheaper to run until it crosses the audit threshold. A Private Limited Company must appoint an auditor within 30 days of incorporation and get its accounts audited every year, even with zero revenue. It also files AOC-4 and MGT-7A after an AGM, DPT-3 by 30 June and DIR-3 KYC for each director. In the market, that package costs ₹20,000 to 50,000 a year. An LLP files just Form 11 by 30 May and Form 8 by 30 October, and needs an audit only above ₹40 lakh turnover or ₹25 lakh contribution, so ₹8,000 to 20,000 a year is typical. Late fees also differ: ROC forms attract ₹100 per day per form for a company, while LLP late fees rise with the delay.
Which is better for raising funds?
A Private Limited Company, without question. Angel investors and venture funds buy equity or compulsorily convertible preference shares, and both exist only in a company. A company can also create an ESOP pool to hire senior people at below-market salaries. An LLP has no shares: an investor would have to become a partner, take on a share of management and profits, and negotiate every exit clause in the LLP agreement. Almost no institutional investor will do that. Banks are neutral between the two for loans, but a company's audited accounts and MCA filings make due diligence faster. If there is any chance you will raise money in the next three years, start as a company rather than converting later.
How are the two taxed differently?
A company pays 25% on profits if turnover is up to ₹400 crore, or 22% under Section 115BAA if it gives up exemptions (about 25.17% with surcharge and cess). When it pays a dividend, the shareholder is taxed again at their slab rate. An LLP pays a flat 30% on profits, but the share of profit a partner takes home is exempt in their hands. Partners can also draw remuneration and interest on capital, which the LLP deducts within the limits of Section 40(b). For a small services business where the owners take out most of the profit, an LLP is often the lower total tax. For a business that reinvests profits, the company's lower headline rate usually wins.
Can you convert one into the other later?
Yes, in both directions, but it takes time and money. An LLP can convert into a Private Limited Company under Section 366 of the Companies Act, which needs at least two members, a fresh name approval, consent of all partners and creditors, and a newspaper notice. A company can convert into an LLP if it has no outstanding security interest on its assets and all shareholders become partners. Either route takes 4 to 8 weeks and can trigger stamp duty and tax questions on the transfer of assets. Registrations such as GST, bank accounts and contracts have to be updated as well. Choosing correctly on day one is cheaper than converting in year three.
